A Dispute about Disputes: The Gathering Storm over ISDS

Investor-State Dispute Settlement (ISDS) is a mechanism that is included in many regional and bilateral free trade agreements, as well as in bilateral and multilateral investment agreements. In general terms, the ISDS mechanism allows investors of a party to an international agreement to take direct legal action — in the form of international arbitration — against the government of another party to that agreement in response to measures taken by that government that negatively impact the investor and that are inconsistent with the mutual commitments made under the agreement.

A Useful Tool for Investors

The ISDS mechanism is generally viewed favourably from the investor’s point of view, as the threat of arbitration is thought to be an efficient way to deter governments from stepping outside the boundaries of their negotiated commitments. From the government’s point of view, signing on to an agreement containing an ISDS mechanism has two advantages: it ensures their own citizens are protected when investing abroad and it serves as a signal to foreign investors that the government is serious about creating a secure investment climate.

Recent Controversy

ISDS has become an increasingly controversial topic since the United States began negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the European Union in July of 2013. To the extent that recent objections to ISDS can be said to have a unified theme, it is that the mechanism is too great of an imposition on a government’s “right to regulate,” with some critics going so far as to say that it constitutes an erosion of the democratic principle itself.

Anger over ISDS in the TTIP has spilled over onto the recently concluded, but not yet ratified, free trade agreement between Canada and the European Union — the Comprehensive Economic and Trade Agreement (CETA) — which also contains an ISDS mechanism. Although the CETA negotiations have already come to a close, the agreement may need to be ratified not only by the European parliament, but also by each national government, several of which have been outspoken critics of the agreement’s ISDS provisions.

What to Expect Going Forward

Despite the current wave of controversy, ISDS in some form or another has become a standard feature of trade and investment agreements and will likely continue to find its way into future trade and investment agreements. ISDS critics are, however, unlikely to be entirely ignored, and so we can expect that going forward the scope of ISDS provisions will become more circumscribed, allowing governments more flexibility and freedom to pass legitimate measures that are in the public interest without being subject to claims for damages caused to private investors.